Fed Chair Powell likely breathed a huge sigh of relief after Wednesday's press conference concluded. These occasions are exhausting under normal circumstances, and this time he surely knew he would face questions about political influences, legal risks, and his personal future—topics he probably had no desire to discuss. While Powell's statements weren't as dovish as some market participants had hoped, by Thursday, it seemed no one cared anymore. At least U.S. stocks appeared carefree during morning trading. Currently, fiscal and systemic risks seem temporarily sidelined by markets. But is this really the case?

Nominal U.S. Treasury returns remain far below their pre-rate hiking cycle peaks, creating a stark contrast with other debt securities. In fact, the underperformance of U.S. Treasuries relative to the country's other bonds represents the worst gap in 30 years, possibly setting a historical record.

Although Powell characterized this rate cut as an insurance measure rather than an urgent need to pull policy rates back into accommodative territory, markets don't seem inclined toward "sell-on-good-news" behavior. How market sentiment evolves in the coming weeks remains uncertain, but for now, equities appear to have returned to Plan A. Treasury reactions tell a different story, however, with 10-year yields seemingly reluctant to break below 4%.

Similarly, the long end of the curve struggles to maintain yields above 5%. The recent flattening trend in the 5-year to 30-year curve doesn't necessarily indicate particularly strong market concerns about bond risk premiums. While my model's 10-year yield valuation (currently at 3.96%) remains slightly elevated, this spread amounts to little more than a rounding error. When measuring "broad" Treasury risk premiums, the best approach may be comparing them against other markets rather than examining them in isolation.

The chart above displays total returns over the past five years for various U.S. bond categories (nominal Treasuries, TIPS, MBS, investment grade, and high yield). Nominal U.S. Treasuries clearly lag behind all other categories. To some extent, this should be expected since they theoretically represent the safest assets and naturally offer the lowest returns. However, there's a significant semantic difference between "lowest returns" and "remaining deeply negative while others achieve zero or positive returns."

The previous table shows maximum drawdowns from historical peaks for Bloomberg fixed income total return indices. While each index peaked at different times, the overall trend aligns with the chart above. I'm curious whether U.S. Treasuries have ever underperformed other bond sectors by such margins in historical precedent. In other words, have similar Treasury "lagging" situations occurred after previous tightening cycles?

The answer is simple: No. The chart displays Bloomberg U.S. Treasury Index drawdowns from historical peaks compared to maximum drawdowns for TIPS, MBS, investment grade, and high yield bonds. Clearly, this cycle represents the worst relative performance for Treasuries versus other bond categories since at least 1992. I specifically examined relative performance between U.S. Treasuries and investment grade bonds, as well as MBS, from 1972 to 1992, finding no comparable gaps.

Notably, this phenomenon isn't unique to the United States, nor is it most pronounced there. European government bond drawdowns have been equally severe (transitioning from negative to positive rates), with substantial performance gaps versus corporate bonds. The chart below shows cumulative total returns across various asset classes since August 2021.

Clearly, on a global scale, bond investors who distrust government bonds and seek alternative yield sources achieve better returns. From a nominal return perspective, investment grade bonds remain respectable; however, when viewed through inflation-adjusted or Treasury bill-based real risk-free return lenses, the picture becomes somewhat flattering. The following chart employs the previous analytical framework but uses excess returns (relative to Treasury bills) as the metric. Only high yield bonds achieved genuine excess returns.

For risk-seeking investors, while the past matters, the future holds greater importance. Previous underperformance might accumulate momentum for subsequent rebounds. Indeed, recent significant volatility declines support stronger MBS performance, while Treasury bills' future competitiveness versus other fixed income products will diminish.

From a broader societal perspective, public distrust toward government has reached intense levels; I suspect bond market investors share similar sentiments. Avoiding Treasuries and rotating into other securities has proven capable of generating higher returns; given fiscal outlooks across multiple regions, this situation may persist into the future... unless, or until, some volatility or risk-off event emerges.